The Reserve Bank of Australia has stared down some of the more vocal pundits who were calling for a second super-sized cut in its official interest rate, deciding instead on a reduction of 25 basis points to 3.5 per cent. The decision appears to be insurance against the chances that Europe’s deepening financial crisis drags the ­global economy into a renewed downturn.

But the move to shave just 0.25 of a percentage point off the cash rate is also a timely reminder that cheap money and government largesse are not panaceas for the nation’s business and ­consumer funk.

Governor Glenn Stevens is more worried about the outlook for the global economy than he was a month ago, noting in the rate decision statement yesterday that the international environment was now “more uncertain.” The central bank said financial market sentiment had “deteriorated” and it was “unclear” how weaker growth in China – Australia’s key trading partner – would flow through to the rest of Asia.

Yet the cash rate, at 3.5 per cent, still leaves some interest rate ammunition if Europe does degenerate into a full-blown crisis.

The RBA also issued a warning about some of the problems being exacerbated by Australia’s high-cost, low-productivity economy, noting that maintaining low inflation would require growth in domestic costs to slow – or productivity to pick up – as the weaker dollar took the edge off lower import prices. The central bank clearly does not want to tarnish its inflation-fighting record by having monetary policy viewed as the first port of call whenever economic conditions get tough. Lower borrowing costs won’t help get the economy into better shape while voters remain rightly depressed by the shambles of Canberra’s minority government and the desperate policies, including an oversized carbon tax, taken to keep it and its union backers in power.

Treasurer Wayne Swan was trying to take some of the credit for the Reserve Bank move yesterday by pointing to the government’s projected budget surplus for 2012-13, while at the same time urging commercial banks to pass on the full 25 basis point reduction. But Mr Swan should also take note of the warning from Standard & Poor’s that Australia risks losing its coveted AAA credit rating if it doesn’t get its budget house in order.

This would threaten the ability of the banks to raise money in offshore markets. Bashing the banks for remaining profitable is against the national interest.